Can Peugeot-Citroen’s CEO deliver another turnaround?

PSA, the owner of French car makers Peugeot and Citroen, has been transformed under chief executive Carlos Tavares. He’s taken on another, possibly tougher, turnaround job by buying the Opel and Vauxhall brands. Can he deliver for investors again?

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2017-03-07T12:47:30+0000

Source: Bloomberg

When Carlos Tavares took the helm of PSA in January 2014, the owner of Peugeot and Citroen was on the brink of failure. The car maker was the third largest mass market auto manufacturer in Europe, behind Volkswagen and Renault, but it was piling up losses as it struggled to compete in an over-supplied market.

Tavares has performed a remarkable turnaround by going big in China, slashing the cost base, restructuring in the likes of Russia and Latin America, cutting unprofitable model lines and selling non-core businesses. Investors, which include the French government, China’s Dongfeng Motor Corp and the Peugeot Family with 12.8% stakes each, have been rewarded. The stock has risen 46% since Tavares took the helm in March 2014. A €2.5 billion net loss in 2013 had turned into a €1.73 billion net profit in 2016.

Now Tavares, former number two to the head of the Renault-Nissan alliance, Carlos Ghosn, has taken a bold step. He’s acquired the unprofitable European operations of General Motors for €2.2 billion. This is made up of the German-based Opel brand and the UK-based Vauxhall brand. It hasn't made a profit since 1999. It has too many manufacturing plants spanning Germany, the UK, Poland, Austria, Hungary and Spain, and is watching its market share shrink year after year.

By buying Opel and Vauxhall, Tavares has made PSA Europe’s second-largest car maker behind Volkswagen, leap-frogging former employer, Renault. The combined company will initially employ about 220,000 people and make revenues of about €75 billion. Now Tavares needs to make Vauxhall and Opel profitable.

Part of the strategy is to use Opel as the group’s 'German' car brand outside Europe. Tavares hopes that in regions where there’s a reluctance to buy French cars, consumers will instead buy Opel. Then there’s the cost synergies to be gained by combining supply lines, parts bins and dealer networks. Perhaps Peugeot and Opel cars will be based on the same platforms?

The Vauxhall Astra and Corsa remain very popular models in the UK

Top ten 2017 UK new car registrations by model

1. Ford Fiesta

120,525

2. Vauxhall Corsa

77,110

3. Ford Focus

70,545

4. Volkswagen Golf

69,492

5. Nissan Qashqai

62,682

6. Vauxhall Astra

60,719

7. Volkswagen Polo

54,448

8. MINI

48,328

9. Mercedes C Class

44,184

10. Audi A3

43,808

In the medium-term, part of the turnaround is inevitably going to involve rationalisation of the manufacturing base, despite short-term assurances PSA will respect existing labour deals. Tavares has already warned Opel and Vauxhall workers plants are going to have to raise productivity and compete for survival. There’s a huge amount of fear in both the UK and Germany their factories will be the ones to go, despite Tavares saying the company could actually boost its presence in the UK in the event of a hard Brexit to ensure a pound-denominated supply chain.

Given his pedigree, don’t bet against Tavares pulling off this second turnaround. Many Opel and Vauxhall models remain immensely popular in their main markets, and potential sales abroad could drive up revenues at the same time as costs are stripped from the European operational base. Given the wafer thin margins in the European mass car market, just don’t expect the path to be straight.